The Rule of 72: How Inflation Silently Eats Your Savings

That $100 in your savings account feels safe. But every year, inflation is quietly stealing its purchasing power. We ran the numbers to show you exactly how much.

What is Inflation?

Inflation is the rate at which prices increase over time. When inflation is 3%, something that costs $100 today will cost $103 next year.

But the reverse is also true: your $100 will only buy $97 worth of goods.

The Rule of 72

The Rule of 72 is a simple way to estimate how long it takes for something to double (or halve) at a given rate.

Formula: 72 / rate = years to double

For Investments:

• At 7% annual returns, your money doubles in about 10 years (72 / 7 = 10.3)
• At 10% returns, it doubles in about 7 years

For Inflation:

• At 3% inflation, prices double in 24 years (72 / 3 = 24)
• At 6% inflation, prices double in just 12 years

! At the Bank of Canada's 2% target inflation, the value of cash sitting in a savings account is cut in half every 36 years. During 2022's peak inflation of 8%, it would have halved in just 9 years.

We Tested It: Real Inflation Calculations

Using our Inflation Calculator, we analysed how purchasing power has changed over different time periods. Here's what we found:

Test 1: $100 from 1990 to 2024

We entered $100 with a start year of 1990:

Interpretation: If you kept $100 in cash since 1990, it now has the purchasing power of just $47. Prices have more than doubled. Your "safe" savings lost 53% of its real value.

Test 2: $75,000 Emergency Fund Over 20 Years

Many financial advisers recommend keeping 3-6 months of expenses in savings. We tested what happens to a $75,000 emergency fund over 20 years:

Interpretation: Your $75,000 "safety net" loses over $33,000 in purchasing power in just 20 years - without you touching it. After 30 years, it buys less than half of what it did originally.

Try these calculations yourself

The High-Interest Savings Account Trap

Canadian high-interest savings accounts (HISAs) currently pay 4-5% at some banks, but this is unusual. Historically, they paid 1-2%. With inflation at 3%+, you're often losing purchasing power every year.

Real Returns on Savings (typical scenario):

• HISA interest: 2%
• Inflation rate: 3%
• Real return: -1% per year

Even with today's higher rates, half of the interest goes to taxes (outside registered accounts), often leaving you below inflation.

The Canadian Advantage: TFSAs and RRSPs

Canada offers powerful tax-sheltered accounts that make beating inflation easier:

Tax-Free Savings Account (TFSA)

• Current contribution room: $7,000/year (2024)
• All gains are 100% tax-free
• Perfect for holding investments that grow faster than inflation

Registered Retirement Savings Plan (RRSP)

• Tax deduction on contributions
• Tax-deferred growth
• Contribution room: 18% of previous year's income

Our Analysis: A $10,000 investment at 7% in a TFSA for 20 years:

• Final value: $38,697
• Tax paid: $0
• Inflation-adjusted value: $21,425

The same investment in a regular taxable account (at 30% marginal rate):

• Final value: ~$28,000
• After-tax real value: ~$15,500

How to Beat Inflation: We Ran the FIRE Numbers

For those pursuing Financial Independence, inflation dramatically affects your target number. We used our FIRE Calculator to model two scenarios:

Scenario A: Ignoring Inflation

• Annual expenses: $60,000
• Traditional 4% rule
• FIRE number: $1,500,000

Scenario B: Accounting for 3% Inflation Over 30-Year Retirement

• Annual expenses: $60,000 (today's dollars)
• Inflation-adjusted spending in year 30: $145,635
• Required FIRE number: $2,250,000+

Interpretation: Ignoring inflation could leave you $750,000 short of what you actually need.

Calculate your own FIRE number

Investment Returns vs Inflation

We modelled different investment strategies using our Investment Returns Calculator to see which ones actually beat inflation:

$10,000 Over 20 Years

Interpretation: A HISA doesn't just fail to grow - it actively loses money in real terms. You need at least 3-4% returns just to break even.

Model your own investment scenarios

Canadian-Specific Inflation Factors

Canada faces unique inflation pressures:

• Housing costs: Home prices in Vancouver and Toronto have outpaced general inflation by 2-3x
• Import dependency: Weak Canadian dollar increases costs of imported goods
• Carbon pricing: Adds to fuel and heating costs
• Food prices: Canada imports significant food, exposing prices to currency fluctuations

Action Steps Based on Our Analysis

Based on our calculations, here's what the numbers suggest for Canadians:

1. Max out your TFSA first - Tax-free growth is your best inflation protection

2. Keep only 3-6 months expenses in a HISA - Accept the inflation loss for liquidity, but don't over-save in cash

3. Use RRSPs wisely - Great for high earners, tax deduction provides immediate inflation hedge

4. Consider I-bonds for some cash holdings - Canada Savings Bonds (when available) or short-term bond ETFs

5. Adjust your FIRE target - Add 30-50% to your naive calculation

The Bottom Line

Inflation isn't dramatic or visible day-to-day, but our calculations show it can devastate your purchasing power. The Rule of 72 tells us prices double every 24 years at 3% inflation.

Using our calculators, we demonstrated that:

• $100 from 1990 now buys only $47 worth of goods
• A $75,000 emergency fund loses $33,450+ over 20 years
• Cash savings often lose 1% per year in real terms
• You need 3-4% returns just to break even

Don't let inflation silently eat your wealth. Use your TFSA and RRSP room to invest in assets that grow faster than prices rise.

Your future self will thank you.